If you're like millions of Americans, you receive a reminder every month of a financial obligation that may outlast all your other ones. This particular commitment can survive longer than your marriage, or it can still be hanging around after you've sent your kids to college and paid off your mortgage. Shoot, it may very well outlive you.
The obligation that's as sticky as pine tar is, of course, your credit card balance.
The credit card industry has made piling up debt as easy as throwing kindling on a bonfire. Here's the industry's trick: Make the debt seem manageable by requiring minuscule minimum monthly payments. Think of this strategy as putting a yellow smiley face on Frankenstein.
Consumers have traditionally been able to write monthly checks that represented just 2 percent or 2.5 percent of their outstanding balances. Americans who made just the bare-bones payments would not necessarily realize that their checks were not making even the tiniest dent on the principal owed. In fact, the checks sometimes wouldn't even cover the interest generated during the previous month.
Folks who have embraced this tortoise repayment method have often gotten into a heap of trouble.
Suppose, for instance, someone made payments of just 2 percent on a $10,000 balance. If the credit card charged 18 percent interest, it would take 691 months to retire the debt. And that assumes the borrower never used the card again. By the time 2063 arrived, the debtor would have paid $28,931 in interest.
Of course, it's costly to let your debt linger this long. The folks in Washington, D.C., came to that realization three years ago when the Federal Reserve and the Federal Deposit Insurance Corp., among others, issued guidelines that urged card issuers to hike the minimums by the end of 2005.
Under the new rules, issuers are now supposed to require minimums that will cover fees and finance charges, as well as 1 percent of the principal.
In essence, this means that minimum payments have doubled. Consequently, most consumers must now pay 4 percent or 5 percent of their balances. Instead of owing $200 a month on a $10,000 debt, the minimum has jumped to $400.
That may seem stiff, but it will dramatically reduce the time you spend indentured to a lender. In this scenario, the borrower would pay off the tab in 178 months instead of the 691 months, and the interest would total $5,916. That's a savings of $23,015. You can play with your own figures by using Bankrate.com's online credit-card calculators.
While this tough-love move may seem cruel to the 43 percent of consumers who carry monthly balances, the new minimums are still modest compared with historical ones.
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